| This study addresses the conditions necessary for auditors to detect fraud. I find that two of the primary elements of SAS No. 82, Consideration of Fraud in a Financial Statement Audit, effective for audits after December 15, 1997, will aid auditors in their detection of fraud. These two elements are explicit mention of "fraud," and the use of fraud risk factors as cues indicating the possibility of fraud.; The case study that auditors complete includes a written narrative and financial statements of a manufacturing and distribution company. Questions elicit auditor beliefs about the presence of material misstatements in accounts receivable and inventory, the potential causes of misstatement and any other issues or concerns the auditor would address. The experimental design includes controlling for two variables, perceptual readiness for fraud, and the presence of fraud risk factors. Perceptual readiness is defined as a heightened accessibility of a concept (in this case, fraud) that allows for the swift and easy recognition of relevant evidence (in this case, fraud risk factors). Perceptual readiness for fraud is included in the case through the use of a specific question asking for the likelihood of fraudulently misstated financial statements in the case. One half of the auditor participants received a case with fraud risk factors in a narrative and the others received a case excluding these fraud risk factors. The fraud risk factors are defined as "management characteristics" in SAS No. 82 (as opposed to industry conditions or operating characteristics and financial stability).; Results indicate auditors are more likely to suspect fraud when they are perceptually ready for fraud and risk factors exist than when perceptual readiness is absent, fraud risk factors are absent, or both are absent. Neither perceptual readiness for fraud nor fraud risk factors alone are sufficient to suspect fraud. |
